Looking for some companies to research this weekend? Here are five that I like. Each passes the ModernGraham tests for the Enterprising Investor, based on the teachings of Benjamin Graham. The valuation is based on a modernized version of Benjamin Graham’s IV = EPS x (8.5 + 2g) formula presented in The Intelligent Investor, with the earnings per share being normalized through a weighted average over the last five years.
- American Electric Power Co (AEP) – American Electric passes the tests for the defensive investor, which automatically qualifies the company for the enterprising investor as well. The current ratio of 0.78 could be improved, but the company has earnings stability, growth, and a strong dividend record. The dividend yield is currently 1.64% and the normalized earnings per share is $2.84, leading to a P/E of 10.84. Based on my estimate of growth, I value the company at $44. The company recently began capturing carbon emissions at one of its plants (the first to do so in the nation), and appears to be well suited to adapt to the growing “green” movement.
- Aflac Incorporated (AFL) – Aflac also qualifies for the defensive investor. The company has had very stable earnings and earnings growth. In addition, the dividend yield is 2.50%, normalized earnings per share is $3.32, and P/E is 13.00. I currently value the company at $78. Insurance companies are – traditionally – solid investments when the price is down, and the market today seems to be redefining the concept of beating down financial/insurance companies. Aflac’s latest earnings release beat expectations and I believe the company still has a way to go back up.
- Chubb Corp (CB) – Chubb Corp, like the previous two companies, is suitable for the defensive investor. The company has a strong balance sheet and very strong stability. Another insurance company that seems to be a bit undervalued, Chubb has a dividend yield of 2.74%, normalized earnings per share of $5.42, and a P/E of 9.30. I currently value the company at a whopping $167 (based on the company’s great growth over the last 10 years) – a more “conservative” estimate based on only 3% annual growth comes to $79. In fact, based on the normalized earnings per share of $5.42, the market is currently implying only a 0.49% annual growth rate over the next 7-10 years. Surely that can be beat, given Chubb’s recent history of growth.
- E.I. du Pont de Nemours & Co. (DD) – DuPont does not qualify for the defensive investor based on a low current ratio (1.61), lack of strong enough earnings growth over the last 10 years, and a high price to book ratio. However, the company does pass the tests for the enterprising investor as the current ratio is over 1.5, and earnings have grown over the last 5 years. The dividend yield is a very appealing 4.97%, the normalized earnings per share is $2.41, leading to a P/E of 13.68. I value the company at $41. One of the most compelling traits of the company is the dividend. This week they declare the fourth quarter dividend of $0.41/share – the 421st consecutive quarterly dividend. Now that is dividend record stability!
- Entergy Corp (ETR) – Entergy Corp passes the tests for the defensive investor with flying colors. The only thing holding it back from a perfect score is the current ratio of only 1.18. The company yields a dividend of 3.00%, has a normalized earnings per share of $5.72, and a P/E ratio of 13.73 based on that normalized earnings per share. I value the company at $137. I believe the company is strongly suited to perform well over the long-term based on its efforts to grow its nuclear division. Entergy currently is the second largest producer of nuclear energy in the United States and is seeking to build more nuclear plants. Like American Electric Power Co, the company appears to have a good future ahead of it with the “green” movement.